If you’re running one of the estimated 1.5 million nonprofit organizations in the U.S., it’s time to start rethinking your accounting methods. Big changes are coming soon for how nonprofits report net assets and prepare financial statements. Although FASB announced the changes last summer, the implementation doesn’t begin until December 15, 2017.
If you’re like most organizations, early adoption was a hope but not a reality. Now you’re faced with a looming deadline. Here’s how to prepare.
Overview: What’s Changing?
In an effort to help donors and other stakeholders make better decisions about nonprofits’ financial statements, the Financial Accounting Standards Board (FASB) spent three years collecting information and comments to update nonprofit accounting rules.
The biggest changes are coming with how nonprofits record assets. Going forward, there are only two classifications for net assets: without donor restrictions and with donor restrictions. Other changes to assets include:
- Footnote disclosures for assets with donor restrictions
- Footnote disclosures on board-designated net assets
- Time restriction over an asset’s useful life no longer allowed
- Placed-in-service approach required when the board releases restrictions on long-lived assets
- Endowments with assets less than the original gift amount must be reclassified in net assets with donor restrictions
- Plus more disclosures: original endowment amount and spending policy for the funds, and whether that policy was followed
Expenses
- Investment expenses against return required on statement of activities
- Separate statement on function and nature of expenses, including method of cost allocation
- Disclosure on what’s included in investment expense no longer needed
Other
- Statement on liquidity to include methods of managing risk, exposure to risk, and availability of assets
- Cash flow can be presented either directly or indirectly
Implementation
There are different dates for implementing these changes, depending on your fiscal year-end. The new standard is in place for annual financial statements issued for fiscal years beginning after December 15, 2017. For interim period reporting, the standards are in effect one year later: December 15, 2018.
Many of these changes have been options under current GAAP standards, whether a nonprofit used the options or not.
One option for nonprofits to adjust to these new reporting standards is to use a classified balance sheet. Moving to a classified balance sheet from unclassified requires you to break out categories of assets, and with the additional reporting requirements, this may be a good place to start.
How to reclassify assets? Here are some possible steps you can take, depending on your organization and its accounting system:
- Set up new codes to track information on assets
- Add new accounts to reflect additional required details
- Roll up temporary and permanent restricted net assets into one account
- Use the grouping feature in your accounting software, if it’s available
- Reclassify any restricted assets with time limits for property and equipment
- Create new accounts for board-designated net assets, such as operating reserves
- Review board-designated sub-accounts and reorganize as needed
Phase II
Not all changes are included in the upcoming standards revision. There are more to come, including intermediate operating measures and aligning measures of operations between the activities statement and cash flow statement. There is no current timeframe for Phase II.
Any changes to your nonprofit accounting should be done with the help of your accountant and under the supervision of your board. If you don’t currently have an external auditor, now is a good time to consult with one – even on a temporary basis. Naden/Lean’s team is familiar with nonprofits and nonprofit accounting, and are ready to answer any questions on implementing the new FASB standards. Contact us for more information.
Stay tuned for more posts on the nonprofit accounting changes next month.